After a sustained rate cycle, the RBA has moved. Here's what that means for your construction loan repayments, draw schedules, and how to lock in the best deal now.
James Hartley
Construction Finance Specialist
The RBA's rate decisions in late 2024 and into 2025 set the tone for borrowing conditions in 2026. For anyone planning a knockdown rebuild, understanding how construction loans work in the current environment — and how rates affect your actual repayments — can save you significant money.
Unlike a standard home loan where you draw the full amount on day one, a construction loan releases funds in progress draws — typically 5–6 stages tied to build milestones: slab, frame, lock-up, fixing, and completion.
This matters for your repayments: you only pay interest on the amount drawn to date. If your build costs $800,000 and you've drawn $200,000 at frame stage, you're only paying interest on $200,000 — not the full amount. This is called the interest-only period and typically runs until completion.
With the cash rate lower than its 2023–24 peak, construction loan variable rates from major lenders are broadly sitting in the 6.0–7.5% range depending on LVR and lender. The key metric for KDR borrowers is the all-in cost over the build period — typically 12–18 months of interest-only payments followed by principal-and-interest repayments once you move in.
Example: $1M construction loan, 6.5% interest rate, 14-month build averaging 60% drawn: interest cost over the build ≈ $45,500. Worth factoring into your total project budget.
Most lenders don't offer fixed rates during the construction (interest-only) phase. The draw-down nature makes it difficult to fix — you're not sure exactly when each draw happens. Once construction is complete and you convert to a standard home loan, you can then choose to fix.
Given current rate conditions, many borrowers are choosing to stay variable for now and reassess at completion. Get advice from a broker before deciding.
Banks lend against the on-completion value of the property, not the build cost. If your block is worth $700K and the completed home is valued at $1.4M, the bank will lend based on that $1.4M figure (typically up to 80% LVR = $1.12M). But if the valuer comes in lower than expected, you may need more equity — a common source of surprise for KDR borrowers.
Tip: Get a pre-build valuation estimate from an independent valuer before committing to your builder contract. Some brokers include this as part of their service.
Connect with finance brokers who specialise in KDR and construction lending.
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